Are you missing consumer credit opportunities?

Millennials have stepped up use of personal loans, paying over time, as they make less use of credit card accounts.

Banks may be missing a shift in consumer credit preferences that could disconnect them from millennial customers who are approaching their peak purchasing—and borrowing—years.

And it’s not that institutions don’t offer the product they are shifting to.

Instead, the problem is this: Banks offer it in an inconvenient way. Or, basically, as just another choice on the shelf, with no promotion or customer guidance.

The product concerned is the personal loan—a credit structure that’s decades old. Yet it is becoming a product of choice among millennials, which represent one-quarter of U.S. consumer buying power.

Millennials and personal loans

For a time, millennials were portrayed as debt-averse, but a new TransUnion study paints a more nuanced picture, as the realities of adult life step up for more in this generation. (TransUnion defines them as those born 1980-1994—today’s roughly 23-37 year olds.) Millennials certainly borrow, but they are setting different patterns in credit than Generation X consumers. The study also determined that millennials continue to lag Gen X in credit participation levels, overall.

In the space of one generation, credit preferences appear to be evolving. At least in part the option of borrowing from online lenders and the broadening use of debit cards for payments each appear to have had some influence. Lingering ripples from the financial crisis, including regulatory tightening, also appear to play a role in the shifts. Finally, income levels of millennials also appear to influence credit usage.

These are among the broad trends identified in the new TransUnion study, which compares the credit behavior of millennial and Gen X borrowers at the same points in their lifecycles. (The study used 2015 as the representative year for evaluating millennial behavior and 2001 for Gen X.)

Overall, TransUnion’s Ezra Becker, senior vice-president and head of the company’s research and consulting group, says consumers’ behavior largely reflects their times, and the “formative years” of the two generations proved quite different.

Particularly interesting is a shift detected in millennials’ use of credit. TransUnion found that they are slowing their use of credit cards—both bankcards and private label cards. They are carrying two fewer cards, on average, compared to Gen X consumers at the same respective age. They are also carrying lower card balances.

TransUnion credits this trend in part to the CARD Act of 2009. The act severely limited marketing of credit cards to college students when many millennials were in school. Becker said this delayed many younger consumers’ introduction to plastic. (Bankcard usage is off from Gen X levels at comparable ages even among super prime millennials, according to the study.)

However, this does not mean millennials aren’t borrowing. In fact, they obtain personal loans at almost twice the rate that Gen Xers did at the same ages. (They are also applying for auto loans more than did Gen X—21% more.)

Digitalization is the factor that TransUnion believes has helped influence this shift in the form of personal credit. And that’s where the warning for banks begins.

Fintech lenders steal the show

Becker points out that for millennials, the digital experience frequently is the experience of choice. While they aren’t alone in shopping via app or laptop by any means, millennials were the first generation to grow up in a digital age where such tools were there from the get-go. As benchmarks, Amazon was founded in 1994, when the youngest millennials werejust born, and the iPhone launched in 2007, when the youngest millennials were 11.

For every age studied by TransUnion (21-34 for both generations) millennials opened personal loans much more than did Gen Xers.

That said, Becker reports that fintechs have clearly outpaced both banks and credit unions in making personal loans among millennials. He suggests that millennials’ preference for online—often mobile—shopping for consumer goods and even for cars makes them key candidates for an online borrowing experience. And he says fintech consumer lenders as a group have clearly designed a product and an interface that play to the millennials’ desire for a quick online experience and a quick result—as in “Apply today, get your loan funded tomorrow, or sooner.”

Yes, banks often offer personal loans, but that’s where the competition typically ends, says Becker. Usually the would-be borrower must go to a branch to obtain the loan, something that doesn’t play for millennials. Banks may offer personal loans, says Becker, but not with any spark or priority.

Comparing the online experience

We took a look at six very large banks’ websites, pretending we were looking for a personal loan.

• One bank’s home page immediately offered up a variety of consumer banking choices, but none of them personal loans. Several clicks and a search on the site later, still no clue how to get a personal loan from this bank.

• Another bank made it obvious early enough that personal loans can be opened. However, a click or two later one learns that one must have an account relationship for such loans. “[Personal] Loans and Lines are only available to existing customers. Please visit a bank branch to apply for eligible accounts.” Ditto for another megabank, although that one made it clear early on that, if you are a customer, it not only could take an online application but render an immediate decision.

• Another big bank gave no clue about personal loans beyond a toll-free number obtained after a search on the site.

• Another very large bank brought us quickly to a point where online application could be made—but after two screening questions, said, “You must be a checking or savings account customer to apply for a Personal Loan on this site.”

Just for kicks, we checked a large bank that makes a very big deal about its convenience. You can apply online and get approval in 48 hours. But you have to go to one of its many branches to close the loan.

By contrast, in a visit to the Lending Club site, we were into a prequalification routine within seconds of arriving on the home page. On the home page for “Marcus by Goldman Sachs,” the Wall Street bank’s digital consumer lending site, the experience is equally quick. Along the way we noticed a Marcus advisory: “No fees. Ever. Truly, we make money on interest, not fees.”

On that point, we asked Becker about the cost of fintech personal loans—some observers say that credit from marketplace lenders tends to be pricey.

“That they charge higher APRs across the board is not reflected in the data,” counters Becker. In fact, he adds, “fintechs show some of the best risk-based pricing that we’ve seen.”

The advent of options within options is also of interest. For example, American Express recently introduced “Pay It Plan It,” a set of choices that allow credit card users to pay with a card account, and then make a choice. They can: pay off their charge immediately—virtually making the purchase a debit transaction; leave it as a credit card charge; or transfer it to an installment-based plan (fee-based, not interest-based). The Amex product was specifically designed for millennials, and appeals to those who want to carefully manage their credit card line. The full range of program options is accessed via app.

This is an example of how digitalization is impacting credit decisions, but the trend appears to be broader than the design choices of a single large provider.

We also visited two sites consumers use for financial shopping, NerdWallet and Credit Karma. Site sections dealing with personal loans give out some general advice, and there are also advisory blogs and such. Listings of providers of personal loans typically appear to include only online lenders, mostly nonbanks. One large bank was mentioned on Credit Karma when we looked, with only three reviews (all positive, by the way) versus hundreds of reviews of nonbank personal lenders (not always positive).

More differences in how millennials use credit

The wider availability and increasing use of debit cards as a payment vehicle for millennials has eaten into the use of credit-based plastic for this generation, according to TransUnion, adding to the erosion of credit card usage. (The study did not look at Gen Z consumers, who Becker says are only beginning to enter the world of credit.)

Before the advent of ubiquitous credit card usage, those consumers who had them or checking-activated credit lines enjoyed ready access to credit for instant gratification and greater convenience. Consumers who didn’t qualify for these unsecured vehicles needed to apply for personal loans, which entailed a loan-by-loan, traditional credit evaluation process. The fintech personal loan has changed the balance.

“While many millennials still use credit cards, it’s understandable to see fewer 20-somethings today possessing and using credit cards when we take into account the regulatory environment, the popularity of debit cards, the ease of online loan origination, and other salient factors,” Becker says.

The TransUnion study found that millennials’ use of auto loans is higher than it was for Gen Xers at the same ages—up 21%. Meanwhile, their use of home loans has been lower—down 47%.

The rise in auto-related borrowing came as something of an initial surprise to Becker, but he suggests that the fundamental need to get to work is one factor. Another is the long-term trend towards longer and longer terms for auto loans. Nowadays car loans can run as long as 84 months, he points out. At one time a seven-year auto loan wouldn’t have been imaginable. But lenders’ willingness to make loans that long enable borrowers to buy more car and a newer car than older generations would have at comparable ages.

Mortgage loans, on the other hand, have fallen off by 47% for millennials compared to Gen Xers.

One reason Becker credits to generational experience. Gen Xers grew up seeing homes as a solid investment that built wealth, overall. By contrast, growing up during the financial crisis, says Becker, many millennials saw their parents or other adults burned by home ownership.

While millennials have grown old enough at one end of their generation to form families and want homes (earlier TransUnion research found that 75% of millennials plan to purchase a home someday) the generation also includes people who don’t want to be tied down, preferring to rent housing currently.

Post-crisis mortgage regulations that stressed credit affordability have had a significant effect, according to Becker. Credit supply for millennials seeking mortgages is considered constrained.

Becker also notes that in most markets home values have been rising faster than wages, pricing more millennials out of homeownership currently. He says that while mortgage borrowing is off among millennials, that trend is seen even among super prime borrowers. In this credit segment 13% of millennials had mortgages, while 16% of super prime Gen Xers did at a comparable age.

Mortgage originations among nonprime borrowers among the two generations have declined significantly, Becker says. The study noted that there are more subprime and near prime borrowers among millennials than there were at the same ages for Gen X. That, and subprime millennials are performing worse than Gen X borrowers in auto, card, and personal loan markets.